What Is Rule 86B — the 1% Mandatory Cash Payment Rule?
GSTZone Desk · Updated 2026
Short answer
Rule 86B restricts businesses with over ₹50 lakh of monthly taxable supply from using ITC for more than 99% of their output tax liability — forcing at least 1% to be paid in cash — unless they fall into one of several specific exceptions.
In detail
This rule was introduced specifically to disrupt fake-invoice and circular-trading fraud, where a business generates entirely credit-based invoices with little real cash movement, using purely paper credit to discharge 100% of its output liability every single month.
It applies only above a threshold — value of taxable supply (excluding exempt and zero-rated supplies) exceeding ₹50 lakh in a month — targeting mid-to-large taxpayers rather than small businesses, who are unlikely to be structured for this kind of fraud in the first place.
A number of genuine businesses are automatically excluded even above that threshold: if the proprietor, partner, or managing director has paid more than ₹1 lakh of income tax in each of the last two financial years, if the business received a refund exceeding ₹1 lakh from unutilised ITC (export or inverted duty) in the preceding year, or if it’s a government department, public sector undertaking, local authority, or statutory body — Rule 86B simply doesn’t apply to any of these.
GSTZone tip
If your business genuinely qualifies for one of the exceptions (particularly the income-tax-paid exception, which is common for established businesses), keep that supporting documentation ready — the portal doesn’t always apply the exemption automatically, and you may need to demonstrate it if queried.
Related questions
Does Rule 86B apply every month, or only occasionally?+
It applies to any month where your taxable supply value crosses ₹50 lakh — a business can be in scope one month and out of scope another, depending on that month’s actual supply value.
What if I mistakenly use more than 99% ITC in a month I was subject to Rule 86B?+
This is treated as a compliance violation and can attract penalty consequences under general provisions for incorrect tax payment — it’s worth building a system check for this threshold if your turnover is in the range where it could apply.
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